Debt Service Essay ⋆ Essays on Controversial Topics ⋆ EssayEmpire

In this essay, debt service is defined as the repayment of principal and interest on loans to sovereign entities such as cities and nation-states. This restriction of the definition facilitates a focus on social issues precipitated or aggravated by the repayment of such obligations.

Most commonly, governments fund their activities by borrowing the funds needed, usually via sale of obligations, such as treasury bills with terms under 1 year for financing current year operations, or treasury bonds with longer terms. Purchasing governmental obligations allows the buyer to “lock in” a return on the investment made for a long period of time or, if needs change, to resell what should be a widely held, well-regulated investment.

Governments borrowing funds must then repay them according to the terms and conditions of the obligation. Repayment usually requires transferring amounts greater than those borrowed—in other words, repaying both the amount borrowed (principal) and the interest thereon, or “servicing the debt.” When servicing debt starts negatively to impact the provision of social services, the social dimension of debt service begins.

Debt Service in Developing Countries

Debt service in developing countries that causes extended, seemingly intractable social issues is usually the result of one of three scenarios: (1) Funds were lent to countries with a poor governmental structure, meaning with leadership not beholden to the population for its decisions; (2) debt was transferred that arose during colonialism, meaning historical costs incurred by the colonizing country were transferred to the newly independent colony at its independence; or (3) loaned funds were not properly managed, usually meaning that the lenders (in the wealthier countries), instead of ceasing to lend, actually lent more funds as economic or political situations deteriorated.

According to data presented in a 2005 news article by the British Broadcasting Corporation (BBC), total debts amassed by the world’s poorest countries increased more than 20 times in the 3 decades from the early 1970s to the beginning of this decade, rising from—in U.S. dollars—$25 billion in 1970 to over $520 billion in 2002. Specifically to Africa, its share of the total in 1970 was less than $11 billion, not even half the total owed by poor nations. But, by 2002, total African debt stood at $295 billion, over half the total owed by all poor countries. Perhaps the bleakest fact is that, although the world’s poorest countries have repaid $550 billion in principal and interest over the past 3 decades, on $540 billion of loans, these same countries are currently spending $13 on their debt repayments for every $1 they receive in grants.

Obviously, a country whose government cannot use its revenues, including (and especially) any grants received as humanitarian aid, for any current activity other than debt service, will have social issues. Because all three scenarios (described earlier in this section) seem to be caused by the actions of foreigners, social unrest is also often stoked.

Debt Service as a Political Issue

Debt service as the root cause of social problems has its origin in the creation of the system of exchange rates brought into effect with agreements reached at the conference at Bretton Woods, New Hampshire, in 1944. The representatives of the sovereign states in attendance created the International Monetary Fund (IMF) as an independent organization monitoring monetary flows among sovereign states, agreeing to certain principles for measurement of those flows— and either to assist or to threaten to sanction any state’s monetary policy as it affected world prosperity. Because the member states are generally represented at the IMF by their most senior treasury or finance official—usually an unelected cabinet member or other appointee—virtually every intervention has both monetary and political dimensions.

Thus populations in countries in which debt service markedly diminishes the amounts spent on social costs (health care, housing, public transport, education, etc.) tend to blame their government or the governments of the lending countries—usually members of the Organisation for Economic Co-operation and Development—or the IMF itself. Strikes and riots, resulting from increased intolerance of such situations and impatience in awaiting their resolution, tend to exacerbate the overall problem by reducing the creditworthiness of the nation-state. In turn, this increases interest rates assessed on outstanding debt, further reducing the government’s ability to service its debt.

Issues in Debt Relief

One way to remove issues created by debt service is for lenders to forgive outstanding debt. In theory, funds exported for debt service may then be used immediately to address social issues in-country. But there are at least two problems in relieving debt. First, the real lender—meaning the financial entity— usually requires settlement. This means the government of the lender must use public-sector funds to pay what is generally considered a private-sector debt. This is not very popular among taxpayers, as it seems their government is using their money to rescue big banks from imprudent lending, lending often made to unpopular or dictatorial regimes. Second, debt relief seems to rescue countries that have mismanaged funds or, worse, have misappropriated funds or, worst, continue to commit significant human rights abuses. For example, between 1998 and 2000, Uganda received $374 million in debt relief— while troops were widely reported to be killing white minority farmers.

This situation has caused the World Bank and the IMF to require the government requesting debt relief to create a comprehensive poverty reduction strategy paper (PRSP) that the two organizations must approve before recommending debt relief. The PRSP contains requirements, among many others, for a democratically elected government. This can generate additional resistance at both the leadership and popular levels of such governments: Requiring an approvable PRSP is usually seen as further foreign interference in sovereign affairs.

Still, progress is occurring. The Paris Club is a voluntary gathering of creditor countries that coordinates handling of the debt owed them by developing countries. Since 1983 alone, it has canceled or rescheduled debts worth $509 billion. In January 2007, the Paris Club announced agreements to cancel 100 percent of Sierra Leone’s $240 million in debt. Unfortunately, the Paris Club still has over $500 billion of developing nation debt to go.

Bibliography:

Katsouris, Christina. 2000. “New Conditions Slow Debt Relief.” Africa Recovery 14(1):6. Retrieved March 29, 2017 (http://www.un.org/en/africarenewal/subjindx/141debt.htm).
Madslien, Jorn. 2005. “Debt Relief Hopes Bring Out the Critics.” BBC News, June 29. Retrieved March 29, 2017 (http://news.bbc.co.uk/2/hi/business/4619189.stm).
“Pillars of Peace. Documents Pertaining to American Interest in Establishing a Lasting World Peace: January 1941-February 1946.” 1946. United Nations Monetary and Financial Conference at Bretton Woods: Summary of Agreements. July 22, 1944. Pamphlet No. 4, pp. 30-31. Carlisle Barracks, PA: Army Information School. Retrieved March 29, 2017 (http://www.ibiblio.org/pha/policy/1944/440722a.html).

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